Debt Rattle Jun 11 2014: Japan Enters Financial Nowhere
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Japan Enters Financial No Man’s Land Japan Enters Financial Nowhere We’ve carried a lot of news on Japan’s deteriorating economic and financial situat
[See the full post at: Debt Rattle Jun 11 2014: Japan Enters Financial Nowhere]In America what does not inflate, deflates. Detroit being an extreme example.
There is a particular history rarely mentioned about Detroit. When it’s auto industry and population exploded in the 1915 to 1930 period many of the people flocking there were poor southern, whites. Detroit’s growth came later than Chicago’s or Cleveland’s or other smaller industrial cities where European immigrants contributed most of the new workers for industry. The period of Detroit’s explosive growth was in the WW I to depression period which coincided with restrictive immigration numbers and so internal immigration to Detroit filled the factories.
Blacks came too and while segregation ruled all Midwest major cities there was a particularly virulent aspect to it in Detroit which I think is explained by the transference of white Southern attitudes to Detroit.
Of course the unique aspects of the rise of the auto industry, unions and the rest all played their part in its fall but the unique dysfunction of Detroit is inseparable from it’s extreme racial dysfunction.
Most major US cities of the East and Midwest to a large extent actively participated in their own decline by embracing defacto segregation as policy. Policies designed to produce an underclass. And still, behind it all is my contention that what does no inflate in America, deflates. Americans embrace of ‘growth’ via inflation is total. Which is why as AE’s scenarios come to pass they will probably come last to America and with that will come the end of America too. Without inflation there cannot be an America. There may always be a France or an England but not an America.
“…it will be forced to steadily liquidate its overseas investments to pay its current bills—an investment surplus built up over the course of 50 years.”
Wouldn’t it be to Japan’s massive advantage to let (or force) the Yen much lower against the dollar and Euro during the period of liquidation of overseas investments? That way, the sale of US Treasury Bonds, for example, would fetch far more Yen. Once they are done selling they could allow the Yen to rise to fight CPI inflation.
The yen, at 102 to the dollar, is at basically the same place it has been for the last 20 years. If they are such a basket case, and I believe that they are, why isn’t the Yen tanking like a lead weight? I think it is because the dollar and euro are equally suspect.
My guess is that we all wake up some Sunday morning, in 2015, and find that dollars, yen, and euros have been outlawed. They will be replaced in all your accounts with IMF-World Bank depository receipts with a buying power to be determined by the ‘free’ market, or 1/3 of your current buying power, whichever is lower, lol.
Some monetary reset seems inevitable but I have never heard what it would be. Besides it seems impossible such a thing could simply be imposed from above.
A weak yen is no panacea for a place that has to import all its energy. Currency values being so sort of cure end up being full of the old economics bugaboo, the old on the other hand.
“Besides it seems impossible such a thing [monetary reset] could simply be imposed from above.”
Seems like the IMF has forced a few monetary resets, although on smaller countries. The top 4 or 5 economies are too intertwined for one to go belly up without dragging all the others down with it. That’s why I don’t understand all the focus on Japan or the Euro zone as basket cases that most likely will implode soon. They will all implode or none of them will.
So let’s assume that a reset is coming, and all the major countries will get reset. If it isn’t like I described above, or similar, then the only other alternative is complete anarchy, as far as I can tell.
The TAE description of rapid deflation involves cascading debt collapse, where one man’s inability to service his debt renders his “asset holder” unable to service his, and so on. I think of branching strings of dominoes (dominoes representing debts). Since 2008, government interventions have removed dominoes from the string and prevented large scale collapse, but missing dominoes have tended to grow back, making additional interventions appear necessary as long as they seem to work, at least until they don’t any longer.
Record-setting constructions with dominoes take a lot time to fall, even when huge numbers are falling rapidly. So guessing “when the big deflation will occur” might be misguided. The dominoes are always falling. The better question might be whether they’ll take out specific structures, and if so, when.
The structure doesn’t look as impressive from above, but maybe it would be better for everybody if we placed most of our debt-dominoes further apart because we have an awful lot fewer of them to begin with. Any ideas on how to successfully get people to avoid debt as a general practice for the next hundred generations? Memories of depressions are depressingly short, and laws like Glass-Steigel get abandoned. On the other hand, maybe the problem will solve itself once we get well past peak oil.
“Record-setting constructions with dominoes take a lot time to fall, even when huge numbers are falling rapidly. So guessing “when the big deflation will occur” might be misguided.”
Yeah, you just made a good argument for hyperinflation first, then collapse. If they are gonna keep playing Dutch boy and plug all the major leaks, the TBTF banks will keep on doing what they’re doing. Probably the best example of ‘Dutch boy’ behavior is right next door in Belgium. Ever since the phony ‘taper’ started, tiny Belgium started buying an amount of Treasury bonds equal to the ‘tapered’ amount. They are not even trying very hard to hide it at this point.
The only question is ‘how does it end’? I think that at $8 or $9/gal gasoline (USA price) the fed will say, ‘we hear the American people. They demand action.’ That’s when they make the conversion to IMF-World Bank depository receipts as the new money.
Pipefit: My analogy with dominoes was an attempt to convey what I’ve learned from this website in a simple fashion my little mind can comprehend. From what I’ve gleaned here, the quantity of money in circulation was originated – – and even rehypothecated (think about that) – – primarily as debts (ignoring for the moment that money itself, when issued by a central bank at interest, is a debt instrument from the onset). If most of the money in circulation represents IOU’s that will ultimately not be possible to service (due to rising interest rates) nor repaid (due to further unemployment, etc.), cascading defaults are inevitable. This will effectively return much of today’s money supply to the same “thin air” from whence it came, leaving much less money in circulation. At the bottom of the depression somewhere, most of the remaining money in circulation will be from savings not yet confiscated by Obama, and circulating debt monies that are actually being repaid (extinguished). The point being that the total quantity of money at that time will be minuscule compared to the quantity in circulation now.
My little mind recognizes this as a supply and demand problem. With such a small – and shrinking – supply of dollars, what will their value be relative to today? TAE has made a compelling case that they’ll be worth much more than they are worth now (i.e. their purchasing power will have increased markedly). But this is one of the places where predictions for the future get foggy for me. With dollars being so valuable and coveted, how do you see them being replaced with “IMF-World Bank depository receipts?” Do you see a reason why Americans would be embracing the IMF or World Bank as their savior at that time? After all, they’ll be holding on to the few dollars they have left with sharp talons and an attitude.
There is economics and then there is politics. TAE has described the economics, and in addition, the economics when the perilous energy factor later comes into play. Politics is another matter, and I go to other websites for speculation on that. But if a world war is in the cards, or a deliberately induced reduction of the human population for some reason, I would say all bets are off. The only voice I keep hearing in those cases is attributed to Albert Einstein: “I do not know with what weapons World War III will be fought, but World War IV will be fought with sticks and stones.” So I’m already hoarding clamshells, tailoring loincloths and chipping arrowheads because, well, sometimes it’s just best to place your bets early.
“TAE has made a compelling case that they’ll be worth much more than they are worth now (i.e. their purchasing power will have increased markedly)”
But the credit bust started in 2007, and it is now seven years later, and those dollars are buying less every year. You can verify this yourself quite easily at the gas pump, grocery store, or where you buy health insurance. Also, base money is up several hundred percent in that time span. The federal budget deficit is over $6.5 TRILLION, every year, when measured with gaap accounting, rather than the preferred phony baloney Congressional under counting.
Also, the dollar is not gaining on the yen nor on the Euro, despite those areas being clear basket cases. Therefore, we are a basket case too. So TAE and many others are correct about the major economies circling the toilet bowl.
All attempts at ‘Dutch Boy’ leak plugging or domino propping are vast increases in the money supply. But the world’s economy is stagnant, so you have more fiat buying stuff, but no increase in the amount of stuff, so prices are rising, even with the strong deflationary undertow that you mentioned.
Which force will ultimately prevail? This is unknowable. However we know that every time this has happened in the past, fiat currencies have gone to zero in purchasing power. This is because it is easier to print fiat out of thin air and hand it out like candy than it is sit there and watch the peasants come at you with tar and pitchforks.
You could argue that it is different this time. The weapons that the state has now are so far advanced, technologically, that they could decide to reduce the population of the USA from 330 million to 10 million, if that’s what they want to do. maybe that will happen anyway, if there is a complete breakdown in t he general order.
Note that we’re already back in recession, with below zero economic growth so far this year, and CPI inflation is near 10%, if you measure it the same way they did in the 1970’s. So it looks like it will be stagflation for the time being.
Pipefit, Thanks for your observations. My only reservation with what you say is that the additional $trillions you speak of are additional debt, not hard capital, and I expect to see them vanish with most of the other debt as deflation picks up speed. That first hill on the roller coaster feels pretty steep going up, but what a surprise when it’s even steeper down the other side.
So far as inflation goes, I’m thinking we might be near the last incremental hurrah. Hopefully we won’t have to sit on pins and needles for another six years before it becomes clear which direction this is all headed. On the other hand, I suppose we should enjoy what we have left of normalcy, while we still feel affluent enough to purchase sub-$5 gasoline and complain about it. So maybe another six years of waiting would be a godsend. Whatever, good luck to us all, and no matter what happens, don’t ever let yourself get caught without some cash on hand.
“…don’t ever let yourself get caught without some cash on hand.”
Probably good advice. But doesn’t that assume that there won’t be a complete breakdown in the general order? I think this is a far more important question. From my vantage point, either hyper inflation or deflation could easily cause a complete breakdown. What is to stop such a breakdown from happening, if for example, we get a huge deflationary down draft?
In my view it will be far worse than the Great Depression. This is due to the overly large share of the economy that is retail sales/consumer spending. This sector is already under pressure, and it is so overbuilt, the contraction will be monumental.
So, where are 100 million people going to go and what are they going to do? I know it sounds defeatist, but you see all those unsupported stories about FEMA concentration camps and Homeland Security buying a billion rounds of ammunition, and to me those stories are consistent with the assumed trajectory of the economy.
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